Pandora is raising its subscription prices for new users in May, and ending the $36 annual option. Photo: Pandora / Google Play

Pandora (NYSE:P) announced on Tuesday that it was raising prices for its ad-free, premium One service, and eliminating its annual subscription service. Beginning in May, the company will begin charging $5 a month to new Pandora One subscribers.

Pandora says it is raising prices to correspond with increased operating costs, largely due to the royalties it pays for music. Pandora is eliminating the $36 annual subscription, but says it will not raise prices for existing subscribers.

“The royalty rates Pandora pays to performers via SoundExchange for subscription listening have increased 53% in the last five years,” the company said in a blog post, “and will increase another 9% in 2015.”

A court ruled earlier this monththat Pandora must continue to pay a 1.85 percent royalty rate to the American Society of Composers, Authors and Publishers (ASCAP). Pandora argued that it should only pay 1.7 percent, the same as broadcast radio stations, whereas ASCAP was asking a gradual rate increase to three percent.

Pandora makes the majority of its money off of advertisements aired to over 246 non-paying listeners, about four times the amount it makes from its subscribers. Pandora said it had 3.3 million subscribers currently, although it refuses to disclose how many of those had annual subscriptions.

The company will retain the $4 a month price for current monthly subscribers as well as those who sign up before May 1. Annual subscribers, including those whose subscription ends after the cutoff date, will be offered the lower monthly subscription as well.

Pandora faces competition from a plethora of digital music services, most notably Spotify, which charges $10 a month for its premium music service. Spotify has a radio option for continuous play like Pandora, but is best known for its on-demand catalog, which allows users to select the artist, song or album that they listen to. Spotify has 24 million active users, with 6 million monthly subscribers.

Apple Inc (NASDAQ:AAPL) launched its ad-based iTunes Radio in Sept. 2013. The service is free to users, but Apple charges $25 annually for iTunes Match, a cloud-based storage system that also removes ads from iTunes Radio.

Daniel Freitas, age 26 from Corvallis, Ore., says he was surprised that Pandora has not yet notified him about the policy change, but he will most likely continue paying for the service.

"It's not a matter of [price] so much as convenience," Freitas said. "I enjoy having the music, and I would rather drop a online movie account like Hulu Plus or something before I drop Pandora."